Collecting Social Security benefits is an important part of any retirement income plan, but the process can be complex and difficult to understand. Recent headlines surrounding Social Security have added to the confusion and may be worrying for millions of people planning for retirement in the coming years. Misunderstandings and misunderstandings are common, from how the benefits work to when to start taking them. Here are some of them (along with why they’re not true).
1. Social Security will run out of money before you retire.
Whether you’re nearing retirement or just starting your career, headlines about Social Security solvency can be worrying, especially since so many Americans rely on Social Security. About 25% of people age 65 and older rely on Social Security for at least 90% of their household income.
A record number of baby boomers are turning 65 this year, with more than 11,000 people turning 65 every day. As more people in this generation claim Social Security benefits, there aren’t enough workers to pay into the system to make up the difference.
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As difficult as it may be, don’t let the headlines detract from your ability to make smart financial decisions. Don’t panic and start receiving benefits as soon as possible. If you claim benefits before you reach full retirement age, your benefits will be permanently reduced by up to 30%.
The future of Social Security is uncertain, but it is not doomed. It is funded by a trust fund and uses its reserves and recurring revenue from payroll taxes. Social Security won’t be abolished, but if the trust fund were to fail (the Social Security Administration projects it will cover 100% of benefits through 2035), it would only be able to pay out 83% of the benefits retirees are entitled to. As long as workers and employers continue to contribute to Social Security through payroll taxes, the program will never run out of funding.
2. All you need after retirement is Social Security benefits.
Many retirees believe that Social Security alone provides enough income for retirement, but Social Security is designed to replace only about 40% of your salary. Most people will need as much as 80% of their pre-retirement income to fund a comfortable retirement. The average Social Security check for retired workers is about $1,900 per month, and without other income or savings, it can be difficult to make ends meet.
If you plan to work after retirement, your benefits may also be affected. If you’re under retirement age, $1 will be deducted from your payout for every $2 you earn over the limit. For 2024, that limit is $22,320. Once you reach full retirement age, your benefits will be deducted at $1 for every $3 you earn. In 2024, the cap will be $59,520.
3. I don’t pay taxes on my Social Security benefits.
Many people believe that Social Security benefits are never taxed. But in reality, about 40% of recipients pay taxes on their benefits. why? Because they have other sources of income, such as jobs or investments. You don’t have to pay taxes on your Social Security benefits if 50% of your benefits plus other earned income exceeds $25,000 if you file alone or $32,000 if you’re a married couple filing jointly. It may not happen.
Taxes are complicated, and they can get even more complicated in retirement. Many people think that because they may no longer work full time, they will be in a lower tax bracket, but this is not always the case.
If you don’t know your entire financial situation, you could face some unpleasant surprises when it comes to retirement. Working with a financial advisor can help you develop the right tax strategy for you now and in the future.
4. I’m too young to worry about Social Security.
Even if retirement is years or even decades away, it’s time to start thinking about how Social Security works and how it might affect you. It’s never too early. Programs may be different for Millennials and Gen Z as they retire, so young people need to be flexible about how they incorporate Social Security into their plans.
To have a successful retirement, you also need to save and invest to secure sources of income other than Social Security. The sooner you start, the more money you can save. Even putting aside a small amount of money each month can pay off big in the future.
The rules can be complex and there are different strategies for claiming Social Security benefits, so it’s important to fully understand how this government program works. We recommend consulting with a financial advisor to determine what strategy is best for you.
Drake & Associates is an independent investment advisory firm registered with the U.S. Securities and Exchange Commission. It is created for informational purposes only. This report does not address the specific investment objectives, financial circumstances, or particular needs of any person viewing this report. Neither this information nor any opinion expressed should be construed as a solicitation to buy or sell any security for personal investment, tax or legal advice. While the information cited is believed to be from reliable sources, Drake & Associates undertakes no obligation to update this information or advise regarding further developments in connection therewith. Past performance is not indicative of future results. Registration as an investment advisor does not imply a certain level of skill or training.
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